This paper takes as its starting point recent major changes in arrangements between the federal and provincial governments in Canada concerning the sharing of costs for health insurance programs. The switch from a shared cost (conditional grant) to a modified block funding system was motivated by federal desires to limit and make predictable their expenditures, by provincial desires to increase the flexibility of their allocation of funds and by a mutual desire to limit any growth of health care costs as a proportion of GNP. Concerns related directly to improving medical care delivery were insignificant.

The changes will effectively centralize responsibility for program financing and program delivery, thus providing a powerful incentive for provincial governments to apply very strong measures to control costs. For reasons largely external to the relationship between public sector insurers and the suppliers of medical services, these attempts are unlikely to be successful in the short run. The probable impact of this difficulty on government and members of the health care delivery system is assessed.